Germany's Finance Minister Wolfgang Schaeuble threw his support behind the idea of an IMF-style rescue fund for Europe at the weekend, suggesting that countries with budget difficulties such as Greece could tap into it in future.
The European Commission said on Monday it was working with Germany, France and other European countries on the plans but a spokesman said it was too early to say whether the fund would be just a financial instrument or a new institutional body with its own staff and budget.
In Berlin, Merkel said that while details would have to be sorted out, the European Union needed to have a mechanism to help itself if it hit difficulties, even if it meant changing the EU treaty.
"I think the idea [of a European Monetary Fund] is a good one," Merkel told Berlin-based journalists at the Foreign Press Association, adding issues such as who would contribute and how independent it would be still have to be looked at.
"Without changing the [EU] treaty, it cannot be done. We would need a treaty change," she said. "If the European Union is to be capable of taking action, it will run into such questions," she added. "The EU treaty will not be the end of history. Then we would be in a static system. I don't want that, I want Europe to respond to new situations."
She said the euro was based on the two anchors: the "no bailout" clause - under which no country can take on another eurozone state's debts - and the Stability and Growth Pact's fiscal deficit rules.
ECB sceptical, Commission supportive
While many European policymakers came out in support of the idea, Juergen Stark, executive board member of the European Central Bank, fiercely criticised it.
Such a fund "would become very expensive, set the wrong incentives and burden [those] countries with more solid public finances," he wrote in German newspaper Handelsblatt.
In an article appearing in Tuesday's edition of Handelsblatt, Stark wrote that public acceptance of the euro and the EU would be undermined and that such a mechanism "would not be compatible with the principles of the monetary union".
But Economic and Monetary Affairs Commissioner Olli Rehn said in a newspaper interview published on Monday that the Commission was "ready to propose such a European instrument that has the support of eurozone member countries".
For its part, French finance minister Christine Lagarde expressed reservations, saying an EMF would be "an interesting option" to explore but was "not the absolute priority in the short term".
Proposal comes in late for Greece
Greek Prime Minister George Papandreou said his country supported the creation of a rescue fund, from which it would be able to benefit if need be, though Athens was not asking for financial assistance from the EU.
A Greek delegation led by Prime Minister George Papandreou was in Washington on Monday for a series of meetings with US officials and informal talks with the the International Monetary Fund.
Although Greece has insisted it was not asking for aid, Papandreou put pressure on the EU last week, saying Athens will turn to the IMF if the EU refuses to pledge financial assistance. Before leaving for Washington, the Greek prime minister was in Paris and Berlin over the weekend for talks, leaving little doubt about his intention to raise the pressure on European leaders to act.
In Berlin, Merkel softened her opposition to a possible EU bailout for Greece, saying she did not rule out taking action if Athens got into an "emergency situation".
But she emphasised that this was not the case at the moment. "The immediate inability to pay is, thankfully, not the case," said Merkel. "I cannot rule out anything, but the situation is not with us at the moment," she said.
On Sunday, French President Nicolas Sarkozy had promised that that eurozone countries would help Greece if its financial problems worsened (EurActiv 08/03/10).
Towards more EU integration?
Meanwhile, the idea of launching an IMF-style rescue fund in Europe led to heated comments from political analysts.
Its most recent proponents were economists Daniel Gros of the Centre for European Policy Studies and Thomas Mayer of Deutsche Bank. They said it should be funded first by market borrowing and eventually by contributions from states with debts and deficits exceeding EU limits.
But in order to be genuinely effective, the fund's creation should be accompanied by increased political and fiscal cooperation, something that many countries have opposed so far for fear of ceding too much power to EU institutions.
The German government once opposed the idea of issuing a common bond for the single currency, but it may have changed its mind given public opposition to any Greek bailout, diplomats said.
"Federalists in the EU like the idea of the fund, since it would probably mean closer integration of its members," one EU diplomat said.
"If the fund marks the start of recognition that there needs to be further political integration, then great. If it doesn't, all it will be is sticking plaster," said Simon Tilford, an analyst at the London-based Centre for European Reform.
The EU's Lisbon Treaty that came into force on 1 December does not allow for bailing out eurozone countries, but it does permit aid to EU members outside the currency area.
Economic analysts said the new fund could be based on a provision in the treaty that allows one group of countries to cooperate on certain matters more closely than others. Following that path would boost policy coordination in the euro zone, but also leave behind EU countries outside the currency bloc.
(EurActiv with Reuters.)